The Duffey Law Firm Blog

Tuesday, June 3, 2014

5 Key Thoughts on Florida Estate Planning

Thousands of books and articles have been written on the subject of estate planning.  Creating a plan to serve the best interests of your family and loved ones, requires a significant level of knowledge, experience and expertise.  Clearly estate planning is a complicated topic which encompasses a broad array of issues such as family, taxes, divorce, state and federal laws, accounting, substance abuse, investments and much more that cannot be dealt with on a deep or meaningful level within the confines of a brief article such as this one.  Nonetheless, this article will explore some key concepts and hopefully provide you with some important points to begin your planning process.

1. Begin with the End in Mind

Often clients will ask how to start the process of constructing an estate plan.  Should we begin with the tax concerns?  The family issues?  Administration matters?  My suggestion is to start with the big picture and work down into the key areas of details from there.  Start with the questions; “What is it that you want to happen to your property and assets following your death?”

Most of us want our assets to pass to our children and grandchildren.  For some of us it is important to benefit a charity or to leave a legacy to a cause such as a scientific or medical research project, or support an educational institution.  Consider your assets in terms of where those assets should end up as your threshold consideration.  Once you’ve decided where your assets should end up, you can begin the consideration of the most efficient means of attaining your goals.

2. Two Certainties - Death and Taxes

The tax code is made up of thousands of rules, hundreds of tax court rulings and decisions, and hundreds  of theories on the most tax efficient way to pass wealth from one taxpayor to another, from husband to wife, or from generation to generation.

Big Picture -The U.S. government starts with the proposition that whenever a residence or citizen earns money, the payment or receipt of those monies may (and usually are) subject to income (or capital gains) tax.  On the death of a resident or citizen, the transfer of assets from the deceased taxpayor to another is a transition that may (and usually will) be subject to the estate tax rules and regulations.  In order to prevent the avoidance of estate taxes, the U.S. Government created yet another regimen of taxes – gift taxes, which may be incurred where there are asset transfers during life.  In summary, if you earn money or property, receive money or property or make money on an investment, give money or property away during your life or after your death… you may (and usually will) be subject to taxes, or at the least – subject to sometimes complicated and intricate tax rules.  In addition to the foregoing income, estate and gift tax regimens there is one more tax regimen which may impact your family: generation skipping transfer taxes.  Very simply the concept behind the generation skipping transfer tax regimen may be expressed in general terms as follows: the IRS expects you to pay tax on your death, and they expect to extract a tax (estate tax) on every generation.  Thus, if taxpayor (Grandfather) was wealthy, and if taxpayor’s second generation (Daughter) was also wealthy or at least financially secure, the taxpayor (Grandfather) could skip a generation (Daughter) and leave property or money to next lower generation (Grandson).  By transfers from Grandfather to Grandson the taxpayor would avoid the estate tax on the second generation (Daughter) and thus avoid or skip the potential loss of wealth due to the tax on the death of the Daughter’s generation (the estate tax).  Unless the taxpayor utilized a carefully structured estate plan, the transfer skipping the second generation (Daughter) would incur a generation skipping transfer tax.

Thus, when you work with your estate planning attorney, the taxpayor and his or her advisors will consider: income tax, capital gain tax, estate tax, gift tax and the generation skipping transfer tax.

3. Administration – not exciting but critically important

Just imagine a situation where a taxpayor does everything correctly with regards to taxes, makes all the right moves and choices prior to death and yet, due to various facts and circumstances, the goals and objectives of the taxpayor or the family are frustrated due to poor choices or ineffective administration planning.

Just a few examples of areas that deserve careful consideration include: second marriages, non-United States citizens, closely held businesses, spendthrift or asset preservation concerns.

Experienced estate planners should provide their clients with guidance and suggestions on ways to avoid problems that may be likely or highly probable under the particular facts and circumstances of each given client’s situation.

For example we occasionally see plans created by other planners where the client had a second marriage and intended to leave assets in trust for his second wife, so that she would be comfortable and secure… but then the estate plan names the adult son from the client’s first marriage as the trustee of the second wife’s trust.   In many cases, in fact in most cases, this is a recipe for disaster! Even if the wife of the second marriage and son or children from the first marriage had a good relationship during the client’s lifetime…chances are extremely high that following the client’s death, the administration of the trust will create or at the very least encourage strife between the client’s family members.  This problem is entirely foreseeable and may be easily avoided if the client keeps an open mind and follows the estate planner’s advice and experience.

Setting terms to guide future trustee’s regarding distributions, discretion, consideration of additional sources of income (or not), choice of trustees and mechanisms to change or remove trustees are just a few of the important issues dealt with in the administration considerations.

4. Children’s or Grandchildren’s  Issues – Spendthrifts and Creditors

Another important consideration for anyone contemplating their estate plan is “The Next Generations”.  When contemplating the transfer of wealth one must consider various factors related to the generation(s) which stands to inherit.

First, what ages are the children now?   If the client’s children are adults, are they stable, are there any problems?  At what age should the children inherit?  Should the children receive their inheritance in stages or all at one time?  Should the children’s inheritance be held by a trustee?

Second, are there any creditor issues facing any of the children now?  Might there be a creditor issue in the future?  Creditor issues can arise from business matters, automobile accidents or dozens of other life events.  If the client wants to protect his children’s inheritance from their current or possibly future creditors, that needs to be considered in the administration design.

Third, what about divorce, if the children or grandchildren are adults, are they currently married, are there any marital issues, or perhaps a divorce is already in process?  Whatever the current status of the next generations’ marriages are at the time of the initial planning, one must consider the fact that approximately fifty percent (50%) of all marriages in the United States end in divorce. 

Thus it is prudent for every family with assets to at least consider the possibility or the potential for creditor issues or divorce impacting the client’s descendents at some point in the future.

The good news is that with a bit of careful planning the client can protect his or her family and subsequent generations from the dissipation of assets due to creditor and divorce issues.

Although, generally speaking, one cannot transfer one’s assets into a trust and by such simple transfer avoid one’s own creditors, it is possible and relatively easy to transfer one’s assets into a trust for the benefit of another, such as sons, daughters or grandchildren and through careful design of the trust agreement, the assets of the trust may avoid many if not all the claims of creditor’s or divorcing spouses of the client’s children or grandchildren.

5. Florida’s Special Issues: Homestead and Elective Shares

Every estate plan in Florida must consider the critically important and sometimes complicated issue of Florida Homestead (“Homestead”).  Homestead has many aspects and many potential complications.  There are other articles we have published which deal in more detail with some of the complications of Homestead, here we will introduce only the very basic concepts.

First, one must realize that the term Homestead encompasses three distinct areas of Florida law.   So, as a starting point one should consider which of the three areas are at play:  (1) Save Our Homes – Homestead, this is the Florida constitutional amendment which allows Florida residents to receive a benefit with regard to their ad valorem tax (real estate tax); (2) creditor protection/forced sale – Homestead, this is a protection granted to Florida residents which prevents creditors from forcing the owner of the homestead property to sell the homestead property in order to satisfy certain creditors (exceptions – a lender who provided the monies to acquire the homestead (e.g. bank providing purchase funds)); (3) descent and devise restricted – Homestead, this provides rules on descent and devise: this is one area that often impacts the estate plans of Florida residents in a very problematic way – unless one properly considers and plans for this issue.  What many new Florida residents discover to their great surprise is that, under many facts and conditions, a Florida resident may discover that he/she may not devise their homestead property in a manner which is inconsistent with the Florida Constitution.  The Florida Constitution provides that when the owner of Florida Homestead passes, survived by a spouse and a minor child, the Homestead must be devised to the surviving spouse – outright and free from trust.

All three aspects of Homestead discussed above may impact various elements of one’s Florida estate plan, when properly considered and integrated into the estate plan the challenges of Florida Homestead can be resolved to the satisfaction of the client’s objectives.

Florida Elective shares is also an important element of Florida law which may impact estate plans for Florida residents.  Essentially, in overview, the big picture is that Florida law provides that a surviving spouse may at the surviving spouse’s option elect to receive a certain value of the deceased’s spouse’s estate.  Generally speaking the right to an elective share is granted to the surviving spouse of a deceased Florida resident.  The amount available under the elective share statute is 30% of the “Elective Estate”.  The Elective Estate encompasses more than merely the decedent’s probate estate, it includes assets of the decedent such as IRA and other qualified accounts (e.g. 401K), life insurance policies, assets titled in joint names, annuities and assets titled in the decedent’s revocable trust.  Homestead is not included in the Elective Estate.  The Homestead is in addition to the elective share.  There are a number of ways to deal with the elective share laws including nuptial agreements or the utilization of qualifying elective share trusts.

Clearly estate planning is a complicated area of law.  The important thing to keep in mind is to carefully select your estate planning attorney, then be prepared to carefully consider many different factors in crafting an estate plan that works for you.

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